Friday, January 30, 2015

Greek Negotiations Begin with a Blast

As mentioned earlier, Yanis Varoufakis, the new Greek finance minister, did his first work in economics as a game theorist. I don’t know who came up with it, but the announcement today that Greece will not consult with the Troika is a very big game theory move.

First the announcement: Varoufakis said his government will not collaborate with auditors from the Troika nor negotiate with its representatives. It regards, with considerable justification, the Troika to be an extra-legal body that has micromanaged its economy without any mandate from legally constituted institutions. Henceforth Syriza will engage only with individual European governments and, presumably, the ECB.

On an immediate level this is a challenge to Germany and its allies, since they have used their influence over the Troika to compel Greece to adhere to its (Germany’s) policies. If governments express their views separately, Germany’s position will sit side-by-side with that of every other eurozone country; there is no institutional mechanism by which it dominates them. I can imagine that officials in Berlin, Amsterdam, Helsinki and elsewhere are going ballistic right now.

But there is a deeper implication to this move. After the election, there was quite a bit of public speculation regarding the prospects for negotiation over Greek financial commitments. Most commentators saw Greece in the position of a supplicant: they were throwing themselves at the mercy of European opinion, exhibiting their suffering for all to see. Or so people thought.

The latest move challenges this frame. It is unilateral, and it indicates that Greece does not see itself as without resources. I have no way to judge the effectiveness of the legal challenge to the Troika, but it clearly communicates a stance that says, “We are going on the offensive and will deploy every resource we can get our hands on.” Personally, I believe this does not exhaust the “hidden” resources available to Greece, and I suspect they have contingency plans to roll out other options should the need arise. The point is that Greece has indicated it will not be a pushover, and it has frontloaded its challenge at a moment when the costs to retaliation against them are at their highest.

The next move belongs to the European Commission. They can accede to Syriza’s new framework for negotiations, or they can issue an ultimatum of their own: deal with the Troika or we will expel you from the eurozone. I suspect the second option is out of the question, which would make the strategy pair, up to this point, subgame perfect. We shall see.

So the Greeks refuse the Melian decree. But though you'd know this much better than I, is Varoufakis a game theorist, or rather na critic of game theory as it is applied in mainstream economics?

BTW did you read Daniel Davies screed on this over at CT? (From which I was banned, simply for suggesting that the return to Greek "growth" was simply an artifact of relative rates of deflation, which doesn't help with the debt load). I couldn't construe any grounds for claiming that Greece would now be on a growth path, other than at low rates that are not nearly sufficient to address the "problem".

I will note here also that my pollyanna post has lost its lustre since this announcement. I do not know if this was a brilliant move or not and whether or not Varoufakis is engaging in game theory or not. It did tank the Greek markets late in the afternoon, which does not strike me as all that great of a sign. But, we shall see, I guess.

I can certainly see that they might want to dump the troika. But, negotiating with each individual government and avoiding this Eurogroup that holds 3/4 of the debt as a group looks tricky. OTOH, they do have some possible supporters in there, especially France, who might be willing to cut a deal, even if Germany is adament. I do not know.

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